Abstract

The law relating to the duties of company directors, as presently framed and applied in Australia, does not provide a very reliable guide with regard to the critical question as to whose interest directors are bound to promote when they exercise any of the powers conferred on them. Under current law, actions taken by directors may be sustained by the courts if they are shown to have served the interests of the company as an economic / legal entity. In other instances, they may be upheld if it is established that they were taken for the benefit of the members of the company. At the same time, there are suggestions that in exercising their powers, directors must not be guided solely by the interests of members or the corporate entity but must also take into account the interests of other stakeholders such as employees, suppliers, consumers and the community generally. Because of this, the current state of the law creates a degree of uncertainty as to what constitutes a permissible or impermissible exercise of directors’ powers. This is undesirable. The uncertainty so created renders it difficult, in some instances, to challenge suspect director conduct. There is thus need to reform the law to remove this conundrum. In undertaking this exercise, Australian policy makers could draw some helpful insights from reform initiatives implemented in the United Kingdom. Quite recently, that jurisdiction introduced reforms to its scheme of core company law, including the rules governing the duties of directors. Among other things, these reforms impose a direct obligation on directors to promote the success of the company. Very importantly, the new governing rules make it explicitly clear that in exercising their powers, directors must seek primarily to advance the interests of the members of the company. This is a very significant development. It removes any doubt as to whose interests directors’ actions must be aimed at promoting. To the extent it provides very clear guidance on this crucial issue, this measure provides a very useful reform model that Australia could well benefit from.